What is meant by the term BASE EFFECT read in conjunction with INFLATION?and what is mwant by HEAD;INE INFLATI

Question

these terms are related to inflation

Answer 1

1. The base effect relates to inflation in the corresponding period of the previous year: if the inflation rate was two low in the corresponding period of the previous year, even a smaller rise in the Price Index will arithmatically give a high rate of inflation now; On the other hand if the price index had risen at a high rate in the corresponding period of the previous year and recorded high inflation rate, a similar absolute increase in the Price index now will show a lower inflation rate now.  It is something like this.: 100 goes to 150 and tghen to 200.  The first increase of 50, gives the percentage increase as 50% but the subsequent increase of 50 gives the percentage increase as 33.33%. This happens arithmatically as the base on which the pwercentage is calculated has increased from 100 to 150. Read this to appreciate. There is good news for the government on the price front. Even though the WPI-based year-on-year inflation touched a 44-month high of 7.83% for week ended May 3, International Monetary Fund (IMF) says weekly inflation has slowed down dramatically in the past month.  The problem, it says, lies with the way inflation is calculated, year-on-year, which brings base effect into play, causing inflation to appear higher than it is. Based on a week-on-week calculation, IMF says the annualised inflation is only 3.4%, well within the government’s comfort zone.

2. Headline Inflation also known as top line inflation: Headline inflation is a measure of the total inflation within an economy and is affected by areas of the market which may experience sudden inflationary spikes such as food or energy. As a result, headline inflation may not present an accurate picture of the current state of the economy. This differs from core inflation which excludes factors, such as food and energy costs.

The raw inflation figure as reported through the Consumer Price Index (CPI) that is released monthly by the Bureau of Labor Statistics. The CPI calculates the cost to purchase a fixed basket of goods as a way of determining how much inflation is occurring in the broad economy. The CPI uses a base year and indexes current year prices based on the base year's values.  

The headline figure is not adjusted for seasonality or for the often volatile elements of food and energy prices, which are removed in the Core CPI. Headline inflation will usually be quoted on an annualized basis, meaning that a monthly headline figure of 4% inflation equates to a monthly rate that, if repeated for 12 months, would create 4% inflation for the year. Comparisons of headline inflation are typically made on a year-over-year basis.